International taxation - transfer pricing
This query is : Resolved
17 July 2013
Hello everyone,
Can someone please highlight the different approach adopted by OECD and Indian tax law with regard to the definition of intangibles from transfer pricing perspective.
Thanks
Can someone please highlight the different approach adopted by OECD and Indian tax law with regard to the definition of intangibles from transfer pricing perspective.
Thanks
25 August 2013
First you should understand what is transfer pricing. It is just to stop under billing or over billing of products in international transactions and to stop the same transfer pricing taxation was brought into the act.
There are various method of applying transfer pricing and if the price so applied is not hear the price calculated then additional tax liability is to be paid on completion of assessment.
Now, in case of genuine transactions it cannot be applied as per should be some connection between the supplier and purchaser because if inter related concerns do the billing there is scope of under billing or over billing and accordingly the department can come forward to stop these type of tax evasions
There are various method of applying transfer pricing and if the price so applied is not hear the price calculated then additional tax liability is to be paid on completion of assessment.
Now, in case of genuine transactions it cannot be applied as per should be some connection between the supplier and purchaser because if inter related concerns do the billing there is scope of under billing or over billing and accordingly the department can come forward to stop these type of tax evasions
26 August 2013
Hello,
Thank you so much for your response. But, unfortunately the answer is out of the context of my query. I really needed a clarification on the definition of intangibles, as in what is the difference between the way of defining transfer pricing aspect of intangibles of OECD from the Indian law perspective.
Thanks
Thank you so much for your response. But, unfortunately the answer is out of the context of my query. I really needed a clarification on the definition of intangibles, as in what is the difference between the way of defining transfer pricing aspect of intangibles of OECD from the Indian law perspective.
Thanks
01 August 2024
Certainly! The definitions and treatment of intangibles from a transfer pricing perspective under OECD guidelines and Indian tax laws have some differences. Here's a comparative analysis of both:
### **OECD Approach to Intangibles**
1. **Definition of Intangibles:**
- **OECD Transfer Pricing Guidelines**: The OECD defines intangibles broadly. According to the OECD Transfer Pricing Guidelines, intangibles are assets that are not physical or financial but have value due to the rights they confer. These include patents, trademarks, copyrights, trade secrets, know-how, and other intellectual property. The key characteristic is that intangibles generate future economic benefits and can be identified separately from other assets.
2. **Key Characteristics:**
- **Identification**: Intangibles are identified based on their capacity to generate future economic benefits and their ability to be transferred or licensed.
- **Valuation**: The OECD emphasizes that intangibles must be valued based on their arm's length value, which is the price that would be agreed upon by unrelated parties under comparable circumstances. Various valuation methods such as the Comparable Uncontrolled Price (CUP) method, Profit Split method, and others are used.
- **Control and Exploitation**: The OECD guidelines highlight that the ownership and control of intangibles, and their use, are crucial in determining the transfer pricing arrangements.
3. **Focus**:
- **Functional Analysis**: The OECD approach focuses on a functional analysis to determine the contributions of various parties to the creation, development, enhancement, maintenance, protection, and exploitation of intangibles.
### **Indian Tax Law Approach to Intangibles**
1. **Definition of Intangibles:**
- **Indian Transfer Pricing Rules (Section 92B of the Income Tax Act)**: Indian tax laws define intangibles similarly to the OECD guidelines but with specific references to the types of intangible assets. The definition under Indian law includes patents, trademarks, copyrights, technical know-how, and other intellectual property.
- **Tax Rules**: The Indian transfer pricing regulations have incorporated the concept of intangibles as per the OECD guidelines but include more detailed definitions and examples relevant to Indian circumstances.
2. **Key Characteristics:**
- **Valuation**: While Indian law aligns with OECD practices on the valuation of intangibles, there may be additional rules or guidelines issued by the Indian tax authorities for specific cases. For example, the Indian tax authorities may issue guidelines on the acceptable methods for valuing intangibles.
- **Documentation**: Indian regulations emphasize the need for robust documentation to justify the pricing of intangibles. Companies are required to maintain detailed documentation to demonstrate compliance with the arm's length principle.
3. **Focus:**
- **Arm’s Length Principle**: Like the OECD guidelines, Indian laws require that transactions involving intangibles be conducted at arm's length. The emphasis is on ensuring that the pricing for intangibles reflects what unrelated parties would agree upon.
- **Specific Guidance**: The Indian tax authorities may provide additional specific guidance or clarifications on the treatment of intangibles in transfer pricing, which can sometimes result in interpretations that differ slightly from OECD guidelines.
### **Comparison:**
1. **Flexibility and Specificity:**
- **OECD**: Provides a broad framework and general principles that countries are encouraged to adopt.
- **India**: Follows the OECD framework but may include specific rules, definitions, and examples that are tailored to the Indian context.
2. **Documentation and Compliance:**
- **OECD**: Focuses on the functional analysis and arm’s length principle.
- **India**: Requires detailed documentation and may have additional compliance requirements for businesses operating in India.
3. **Valuation Methods:**
- **OECD**: Offers various methods for valuation and emphasizes arm's length pricing.
- **India**: Aligns with OECD methods but may provide additional guidance or constraints.
### **Conclusion**
Both the OECD and Indian tax laws follow a similar conceptual framework for defining and dealing with intangibles in transfer pricing, focusing on arm's length pricing and functional analysis. However, Indian tax laws may provide additional specific guidelines and documentation requirements tailored to local practices and regulations.
For detailed compliance, it is advisable to consult with a tax advisor who can provide guidance based on the most current regulations and practices in both the OECD framework and Indian tax laws.
### **OECD Approach to Intangibles**
1. **Definition of Intangibles:**
- **OECD Transfer Pricing Guidelines**: The OECD defines intangibles broadly. According to the OECD Transfer Pricing Guidelines, intangibles are assets that are not physical or financial but have value due to the rights they confer. These include patents, trademarks, copyrights, trade secrets, know-how, and other intellectual property. The key characteristic is that intangibles generate future economic benefits and can be identified separately from other assets.
2. **Key Characteristics:**
- **Identification**: Intangibles are identified based on their capacity to generate future economic benefits and their ability to be transferred or licensed.
- **Valuation**: The OECD emphasizes that intangibles must be valued based on their arm's length value, which is the price that would be agreed upon by unrelated parties under comparable circumstances. Various valuation methods such as the Comparable Uncontrolled Price (CUP) method, Profit Split method, and others are used.
- **Control and Exploitation**: The OECD guidelines highlight that the ownership and control of intangibles, and their use, are crucial in determining the transfer pricing arrangements.
3. **Focus**:
- **Functional Analysis**: The OECD approach focuses on a functional analysis to determine the contributions of various parties to the creation, development, enhancement, maintenance, protection, and exploitation of intangibles.
### **Indian Tax Law Approach to Intangibles**
1. **Definition of Intangibles:**
- **Indian Transfer Pricing Rules (Section 92B of the Income Tax Act)**: Indian tax laws define intangibles similarly to the OECD guidelines but with specific references to the types of intangible assets. The definition under Indian law includes patents, trademarks, copyrights, technical know-how, and other intellectual property.
- **Tax Rules**: The Indian transfer pricing regulations have incorporated the concept of intangibles as per the OECD guidelines but include more detailed definitions and examples relevant to Indian circumstances.
2. **Key Characteristics:**
- **Valuation**: While Indian law aligns with OECD practices on the valuation of intangibles, there may be additional rules or guidelines issued by the Indian tax authorities for specific cases. For example, the Indian tax authorities may issue guidelines on the acceptable methods for valuing intangibles.
- **Documentation**: Indian regulations emphasize the need for robust documentation to justify the pricing of intangibles. Companies are required to maintain detailed documentation to demonstrate compliance with the arm's length principle.
3. **Focus:**
- **Arm’s Length Principle**: Like the OECD guidelines, Indian laws require that transactions involving intangibles be conducted at arm's length. The emphasis is on ensuring that the pricing for intangibles reflects what unrelated parties would agree upon.
- **Specific Guidance**: The Indian tax authorities may provide additional specific guidance or clarifications on the treatment of intangibles in transfer pricing, which can sometimes result in interpretations that differ slightly from OECD guidelines.
### **Comparison:**
1. **Flexibility and Specificity:**
- **OECD**: Provides a broad framework and general principles that countries are encouraged to adopt.
- **India**: Follows the OECD framework but may include specific rules, definitions, and examples that are tailored to the Indian context.
2. **Documentation and Compliance:**
- **OECD**: Focuses on the functional analysis and arm’s length principle.
- **India**: Requires detailed documentation and may have additional compliance requirements for businesses operating in India.
3. **Valuation Methods:**
- **OECD**: Offers various methods for valuation and emphasizes arm's length pricing.
- **India**: Aligns with OECD methods but may provide additional guidance or constraints.
### **Conclusion**
Both the OECD and Indian tax laws follow a similar conceptual framework for defining and dealing with intangibles in transfer pricing, focusing on arm's length pricing and functional analysis. However, Indian tax laws may provide additional specific guidelines and documentation requirements tailored to local practices and regulations.
For detailed compliance, it is advisable to consult with a tax advisor who can provide guidance based on the most current regulations and practices in both the OECD framework and Indian tax laws.
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